The current government may have raised the hopes of a nation and of investors with its reform promises, but it needs to start delivering on this front. The Budget has been promising but action on the ground is what the country is waiting for.

Expectations were high that the Union Budget for 2015-16 that Mr. Arun Jaitley presented on February 28 would set the stage for a grand unveiling of a long-term visionary statement from the BJP-led government. Jaitley did not disappoint by coming up with a more credible fiscal consolidation path that gives greater space for the country to spend on economic growth. From being termed 'evolutionary' to 'revolutionary', the most important thing the Budget does is not tinker with aspects that are already working fine, while taking some steps to ensure they keep those economic reform promises made in the run up to the elections in 2014. So far, the government had stuck to incremental changes that have kept sentiments high, but this Budget has raised hopes that the economy is being put on track for sustained growth and even double-digit growth in the near future. It has also aimed at encouraging greater investment in key sectors of the economy and reduced the taxation burden on the corporate sector slightly.

The deferral on General Anti-Avoidance Rule to 2017 will lead to an improvement in attractiveness of India as an investment destination, as the fear of retrospective taxation had completely spooked overseas investors in the past. Easing norms for investment in Alternate Investment Funds, clarity on indirect transfer rules, taxation of real estate investment funds and infrastructure investment funds, have all come up as means to attract foreign investors to invest in India. In a key change for the private equity sector, the Budget has allowed overseas fund managers of private equity firms to set up and manage operations in the country without being classified as a permanent establishment or being taxed.

Investment opportunities
Pre-budget, the biggest hope had been that infrastructure would get the greatest attention from the government, which in turn would create greater opportunities for private equity players to spur investments in the country. PE players have largely stayed away from long-term traditional sectors like infrastructure due to the systemic issues that had plagued the sector. In the last couple of years, investments by PE players have largely been limited to newer sectors such as e-commerce and technology. While this deal activity is expected to continue, M&A activity could also pick up, as the now crowded e-commerce industry looks at some consolidation.

Infra interest
A report by global consultancy Grant Thornton published end-December, points out that the business sentiment in India had picked up since the new majority government took charge and had lead to a spike in mergers and acquisitions and private equity deals in 2014. Grant Thornton estimated that PE and M&A deals involving Indian companies rose 26% on year to $48 billion in 2014 from $38 billion a year ago. Even more crucially, the consultancy indicated that the trend for such activity was expected to grow stronger in 2015.

Besides Grant Thornton, other experts also believe that the sentiment turnaround will fructify in more deals in 2015, with continued deal activity likely in information technology as well as e-commerce, financial services, healthcare and pharmaceuticals. Many believe that even the infrastructure sector, which has been under stress due to project clearances and other issues over the last few years, could get a much-needed booster from the changes announced in the Budget on investment trusts and other funding opportunities.

Beleaguered infrastructure sectors such as power and construction that have seen little deal activity, could see a rise in investor interest, if the government continues to show greater intent on plugging the infrastructure problems and bottlenecks that continue to plague most parts of India.

‘Make in India’ magic
With the government focusing on ease of doing business and 'Make in India', a stronger push for infrastructure is expected to attract investment into this key sector and there could be deal opportunities that might spring up in this area. Not only will these deals attract fresh capital, but also provide initial investors an opportunity to exit, part-exit or even monetise some of their assets.

Easing the path
A clear expression of intent on the introduction of the Goods and Services Tax regime from April 2016 is a significant move forward in the improvement of the business climate, thus making business easier to conduct across India.

Many existing private equity investors will also look for opportunities to exit. Many companies could look at tapping now booming equity markets for funds through initial public offerings, providing PE players a chance to reap the benefit of their investments over the last few years.

Growing trends & challenges
On the M&A front, it is likely that outbound cross-border deals may be lower, with large Indian companies still managing debt. The number of large outbound deals may remain muted, with large companies staying away from committing to multi-billion dollar investments.

In-bound deals into India are likely to stay robust, with foreign companies looking to invest in Indian businesses, while the rising trend of Indian companies selling assets to other Indian companies may continue. We have seen such deals happen in recent times: Lanco selling its Udupi plant to Adani Group, and Jaypee selling cement units to UltraTech.

As such deals get announced, we could witness a growing trend of domestic M&As that will provide PE players an opportunity to exit some existing investments. Such deals to domestic or foreign players could receive the proverbial ‘gentle push’ from existing PE investors.

In conclusion
India's favourable macro-economic indicators are likely to remain attractive. The recent move by the RBI to cut repo rate by 50 basis points and fairly strong rupee are also likely to further spur growth prospects in the country and will make India the investment destination to watch out for.

The government has raised the 'Make in India' slogan and if investors begin to invest in manufacturing and infrastructure to make this dream come true, then deal activity could surge further.

 

K Mahesh

K Mahesh heads the M&A and PE Advisory business for IL&FS Financial Services (IFIN), Mumbai.

 





Disclaimer
Opinions expressed by the Contributors are their own and do not reflect any opinion of IL&FS Financial Services on the said subject

© Copyright 2015-16. All rights reserved.